Economic, geopolitical and environmental factors mean regular supply chain audits are essential to protect global procurement platforms, says Peter Russell, head of manufacturing sector coverage at Royal Bank of Scotland.
Operating in a globalised environment brings a host of new challenges for manufacturers. Identifying emerging markets, applying design or process innovations across borders, and mitigating the risks created by political instability are just a few. So how might growing international remits shape the thinking of those responsible for procurement at UK-based companies?
A fine balancing act
For many manufacturers, global supply chain management has increasingly dominated forward-planning. My colleague Mark Ling, head of trade and supply chain financing for Corporate & Institutional Banking, says, “Volatile input costs, rising fuel prices and higher labour costs make it difficult to manage supply chains which rely on a degree of predictability to perform efficiently.”
Natural disasters and geopolitical developments don’t help. While earthquakes, tsunamis and revolutions are not new, global supply chains increasingly incorporating just-intime systems mean their impact is much more immediate and severe. Sudden shortages of tiny components can be calamitous, as suppliers rush to catch up and manufacturers cast around for alternative sources.
Emerging markets: new opportunities
Manufacturers with supply chains concentrated in geographical clusters have been focusing on how newer or emerging markets might prove advantageous, and not just because of reduced exposure to risk. “The extent to which the Indian Ocean tsunami affected so many countries really trained attention elsewhere,” says Mark Ling. “Today, you might find Chinese suppliers establishing factories in sub-Saharan Africa, so as not to lose out when their customers seek to spread their geographical risks. Countries like Turkey, Morocco and Oman illustrate how North Africa and the Middle East are also gaining prominence, partly as they offer lower shipping or transport costs than Asia Pacific locations.
“However, Indonesia, Vietnam and the Philippines have also been eager to step in as the costs of employing people in China and India continue to rise. For some manufacturers, these countries enable them to continue enjoying the benefits they originally sought by bringing Asia into the supply chain in the first place.”
Of course, there are other considerations, says Mark: “If your organisation is using more currencies to buy supplies, you’ll be subject to greater foreign exchange volatility. If you’re now buying from, say, Brazil or Mexico, your treasury teams may want to review the feasibility of your current sterling or euro purchasing models, depending on the stability or otherwise of the markets you’re exploring. You might also want to more closely examine the relevance and enforceability of your traditional contracts in certain jurisdictions, and as a rule, remain vigilant for early warning signs that trouble could be brewing.’
Procurement: at the heart of strategy and performance
As global supply chain strategy has become a higher priority for CEOs and CFOs, many of the individuals leading procurement teams in the largest multinationals now enjoy representation at board level, alongside their business partners in operations and production. That in turn calls for seamless interaction between heads of procurement and their peers in finance and technology.
“Today, procurement enjoys a greater voice in the boardroom,” says Mark Ling. “Currency risks, reputational risks and commercial risks – even those associated with ethics or corporate governance – are inevitably linked to procurement and supply chains. As those risks can impact directly on revenues, costs and profitability, global supply chain strategy is integral to virtually every aspect of business.”
Absorb the shock, mitigate the risk
Diversification may be the watchword for supply chain strategies – but doesn’t that create greater risk? Not, says Mark Ling, if manufacturers apply tactics to integrate suppliers more closely on an international scale:
- Become a buyer of choice: “Shrewd manufacturers work hard at supplier onboarding and relationship management to ensure they’ll be given favourable treatment; if events beyond their control mean your suppliers find themselves forced to choose between delivering components to you or one of your competitors, you want them to choose you.”
- Focus on your supplier’s suppliers: “Having a Plan B is of little use if your Plan B supplier doesn’t have credible risk-mitigation mechanisms in place itself; but rigorous examination of their own supply chains should be undertaken supportively; what risks can you identify and help to offset? How might your financial buying power make your supplier’s chain more efficient or less costly, ultimately proving more effective for you?”
- Build in stock buffers: “Add flexibility into your inventory systems to absorb shocks and enable you to finance unexpected purchases, ideally without impacting adversely on your working capital.”
Collaboration in action: UK industry sets a worldwide example
The steps required to optimise global supply chains are wide and varied – but what many have in common is a dependence on proactive collaboration, among teams within organisations, and amongst organisations within sub-sectors.
Take the UK’s aerospace, defence, security and space industry. For some time now, it’s been at the vanguard of finding solutions to greater complexity and diversity in global supply chains. Its SC21 framework was devised by trade body ADS, which identified that a disjointed industry-wide approach was holding it back from its potential to fully command world markets. SC21 standardises previously disparate, onerous systems. The end result is a set of uniform definitions and measurements for improving everything from production design, inventory management and working capital management, through to the effectiveness of customer-supplier relationships, order delivery and sustainability objectives.
Graham Chisnall, deputy chief executive at ADS and the organisation’s SC21 champion, explains, “Manufacturers tend to push obligations back down the supply chain, especially in relation to investing in design, production and assembly technology. SC21 provides aligned, verifiable metrics that encourage continuous performance improvement, with risks and benefits shared throughout the supply chain.”
Today, nearly 600 companies – overseas as well as in the UK – have implemented SC21, or are well on their way to implementation. “There have been some stunning results,” says Chisnall. “One organisation says its turnover tripled; others have found that SC21 has been a key factor in winning contracts, as it provides extra, recognisable reassurance to customers.”
SC21 was developed by the very people – heads of operations, heads of procurement, factory managers – involved at every step in the supply chain, giving it endorsement right from its launch. That’s why it’s already being examined closely by manufacturers in other sub-sectors, from automotive and heavy engineering firms to companies making prototype testing equipment and precision engineering goods and components.
Chisnall says SC21’s ready application to the SME and MSB environments means benefits need not be confined to major players. “It’s not costly to get off the ground, and as it’s scalable, it’s easy for smaller firms to use when collaborating with each other. There are certain improvement principles that have to be followed – but otherwise it’s a toolkit that can still be flexed to accommodate the specific demands of different sub-sectors.”
Going global for good
As UK manufacturing strives to reinforce its standing, the farsightedness its constituent members apply to global supply chain strategy is likely to be a key driver for competitiveness, regardless of size, turnover, national or international presence. The indications are that we’ll see more UK-based MSBs and SMEs adapting procurement principles to their advantage, while our large, multinational players continue to set standards for improving global supply chains.